Eugene du Plessis, Director: Tax at Grant Thornton.
The National Treasury has never before had such a big challenge as it does this year in having to plug a seemingly continuously growing funding gap in its Budget vote later this month, from a shrinking pool of resources. It may be left with little choice but to squeeze the trusty ‘golden goose’ even further.
“An increase in the VAT rate may be the easiest way for the government to find the money it so desperately needs, but there will probably be scant appetite to go this route, given the impact on the poor. Instead, the biggest changes will likely affect the higher income taxpayer,” says Eugene du Plessis, Director: Tax at Grant Thornton.
The government’s additional labilities include a bigger interest rate bill on its sovereign debt following downgrades suffered over the past year, as well as the cost of free tertiary education.
“In addition to this, the country was shocked by the bigger than anticipated projected revenue shortfall of R50 billion, announced in last year’s Medium-Term Budget Policy Statement. This has made the Treasury’s task infinitely more difficult,” he says.
“In a low-growth economy where the government’s income on what it produces is still rather poor, there are unfortunately few places from where extra funds can be derived to finance these additional expenditure items. The optimism that is evident among the investment community since the end of 2017 will take a while to filter through to actual economic output.”
VAT not a likely solution in these circumstances
Du Plessis believes that while a possible increase in the VAT rate has been touted in the past – and especially this year as a solution to the revenue quandary – it will likely not be considered in these circumstances, due to the effect it will have on the poor.
“Of course there are always exceptions, and in this case it really depends on the size of the deficit that needs to be funded. Given the amount of revenue that can be gained from a relatively small increase in the VAT rate, the Treasury would definitely consider this. However, the fact remains that this will hit the poorest the hardest. Given the weak economic conditions, alongside with the stubbornly high unemployment rate, the government may not be keen to consider this option.”
One of the ways to soften a VAT increase on the poor is to increase the basket of VAT-exempt goods, and expanding the current basic foodstuffs.
“The other way is to introduce a dual VAT system, where luxury goods are taxed at a higher rate. This may be a good idea in theory, but practically it would be a major administrative burden for both the suppliers of goods and services, as well as SARS that will have to police the implementation of the system.”
He believes increasing the company tax rate would also not be a preferred option for the Treasury: “Our company tax rate will probably stay unchanged at 28%, as any increase in this regard would threaten our business competitiveness.”
The trusty golden goose
Therefore the burden will likely fall on the small gaggle of golden geese that – although squeezed – is more able to carry some additional pressure.
“Unfortunately for the wealthier, the biggest changes in the budget is probably going to affect the higher taxpayers the most, in the form of higher income taxes, as well as less relief from bracket creep.”
Du Plessis also believes the government may implement some of the suggestions from the Davis Tax Committee.
“The Davis Tax Committee has given numerous suggestions for maximising tax revenue that are yet to be implemented, such as the removal of the zero-rating on fuel. This will be a sort-term remedy, but it will serve to plug some of the funding gap. We should also not discount the introduction of a wealth tax,” he says.
“After last year’s increase of five percentage points in the dividend withholding tax rate to 20%, it is unlikely that this will be changed again. The Treasury may instead opt to raise the capital gains tax rate for individuals.”
Furthermore, he expects the usual increases in sin taxes and the fuel levy.
Pain on the short term
He acknowledges that the abovementioned taxation changes aimed at the wealthier and higher earning taxpayers will not effectively plug the significant funding gap, but he believes that these revenue-enhancing measures – along with strict expenditure control – should appease the ratings agencies on the short term.
“While it is certainly not pleasant for the higher income groups to continuously have to fork out more for taxes in various forms, it is worth reminding ourselves that this pain for the country is likely to subside over the medium term. There are encouraging signs of improvements in certain parts of the economy and this, along with stronger investment from companies, should start making a positive difference to the state coffers in the foreseeable future,” he says.
He believes the various measures that have been introduced since the previous Budget speech – some effects of which will only be evident from the end of the current fiscal year in March – will bring some relief to the fiscus over the medium term.
“These include the taxation changes regarding the treatment of trusts. The long-debated sugar tax will also be implemented from 1 April, which should all alleviate some of the pressure going forward.”
He concludes: “There is a realisation in the government that a responsible budget is of crucial importance if we are to avoid another credit rating downgrade, which would make the country’s debt significantly more expensive. Therefore we believe expenditure will be controlled as far as possible, so as to keep a lid on the interest burden for future generations.”
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